The following information was presented by Outdoors Manufacturing Company for an asset purchased at the end of the previous year.$$\begin{array} { | l | r | }
\hline \text { Original cost of the asset } & \$ 20,000 \
\hline \text { Useful life of the asset } & 10 \text { years } \
\hline \text { Cashflow annual operating protit } & \$ 4,000 \
\hline \text { Sabage value } & \$ - 0 - \
\hline
\end{array}$$What is the return on investment (ROI)assuming Outdoors (a)uses the straight-line method for depreciation and (b)beginning-of-year net book values to compute ROI?

Question

The following information was presented by Outdoors Manufacturing Company for an asset purchased at the end of the previous year.$$\begin{array} { | l | r | } 
\hline \text { Original cost of the asset } & \$ 20,000 \
\hline \text { Useful life of the asset } & 10 \text { years } \
\hline \text { Cashflow annual operating protit } & \$ 4,000 \
\hline \text { Sabage value } & \$ - 0 - \
\hline
\end{array}$$What is the return on investment (ROI)assuming Outdoors (a)uses the straight-line method for depreciation and (b)beginning-of-year net book values to compute ROI?

Quizplus · Accepted Answer

A) The ROI calculated using the straight-line method would be calculated as:
ROI = (Annual Operating Profit - Depreciation) / Initial Cost
Depreciation = (Initial Cost - Salvage Value) / Useful Life
Depreciation = ($20,000 - $0) / 10 years = $2,000 per year
ROI = ($4,000 - $2,000) / $20,000 = 0.1 or 10%
Considering the beginning of the year net book value, the calculation is the same, but the book value of the asset at the beginning of the year has to be used instead of the initial cost. As this is the first year of the asset, both initial cost and beginning of the year net book value are the same, and the ROI would still be 10%.

The Following Information Was Presented by Outdoors Manufacturing Company for an Asset